Prices of Treasury bonds have been falling. Short-term bonds, in particular, have declined to levels not seen in about a decade. By definition, falling bond prices lead to higher yields that have a direct correlation to interest rates on HOA loans.
While the yields on bonds with longer maturities have also been climbing recently, their upturns haven’t been as dramatic as the rate increases on shorter-dated securities. This behavior is a bit atypical. Generally, interest rate movements on longer-term maturities tend to be greater than those on short-term instruments.
Think of interest rate movements like ripples that a rock makes when tossed into a calm body of water. The waves nearest to the rock’s entry point or center move quickly while the waves further out cover greater distances. The rates on short-term bonds simulate the entry point of a rock. They usually move quickly. But the longer-term interest rates are more like the ripples that are further from the center. They tend to move a greater distance. The Federal Reserve Bank has begun tossing a few rocks into the lake.
This anomaly in interest rate relationships presents an opportunity for borrowers, especially those who need longer-term money. While entities can still achieve reasonably low-interest rates, this window may not be open for long. Many economists feel long-term interest rates have bottomed out for the foreseeable future. If they are correct, the longer-term consequences will be unfortunate news for future borrowers.
Why should HOAs care about what’s happening in the bond markets? Some HOAs have ample reserves to handle any repairs that come their way. Others can assess owners. However, many HOAs will need to borrow funds when the need arises. If your HOA is on the borrowing side of the equation, you should care. Given how much interest rates have been moving lately and the forecast for future rate increases, you should care a great deal.
If your HOA has been putting off a major repair or improvement, it may be time to re-examine your approach. Consider a scenario where your HOA needs to borrow $1 million and is budgeting for a 10-year loan with a 5% interest rate. The total interest that your association will pay is around $270k over the 10-years. However, if your loan’s interest rate ended up being 6% (an increase of just 1%), your HOA’s total interest payments would be closer to $330 thousand. In this example, a 1% increase in an interest rate would raise your total borrowing cost by more than $60 thousand or over 20%.
Interest rates are still low by historical standards. If your HOA is considering taking out a loan, it may be time to test the market. It’s better to be in front of an interest rate increase than chasing an interest rate once the market has changed.
Arch Capital Solutions acts as an advocate for your HOA. We have relationships with lenders who specialize in HOA loans.
In many states, the board may have a fiduciary duty to make financial decisions that are in the best interest of its members. Arch Capital Solutions can satisfy those fiduciary duties acting as the HOA’s financial advisor. We help HOAs obtain financing and choose the best proposal from multiple lenders.